There is no definition in the Financial Promotion Order of what ‘proper systems and procedures’ are, and the matter will ultimately be for the courts to determine. This is unsurprising as systems and procedures may take many different forms depending upon the precise circumstances in which financial promotions are made. But it is clear that persons seeking conclusive proof that the exemption applies must consciously make arrangements to prevent their dealing with certain recipients in the United Kingdom. In the FCA's view, proper systems and procedures will involve arrangements for scrutinising enquirers or applications with a view to identifying persons who are located in the United Kingdom and are not persons to whom the communication could lawfully have been made. Persons to whom the financial promotion could lawfully have been made does not mean only those covered by article 12. For example, depending on the controlled investment which the financial promotion is about, they could include a certified high net worth individual or a sophisticated investor. Such arrangements may be conducted manually using a questionnaire or electronically through password-protected access to information or the programming of software to recognise and reject United Kingdom addresses or both. The need for proper systems and procedures does not automatically mean that there will no longer be conclusive proof should, on isolated occasions, the systems or procedures fail to prevent dealings with a recipient in the United Kingdom. Provided the systems and procedures were and remain proper there will be conclusive proof that the exemption applies. A financial promotion from overseas might lead to a recipient in the United Kingdomengaging in investment activity with another groupcompany (G) of the person (P) who makes the financial promotion. In this situation, it is not necessary that P operates the proper systems and procedures to get conclusive proof that the exemption applies. It will be enough that G operates the proper systems and procedures.

Financial promotions made by a prospective customer to a person who supplies a controlled investment or services comprising controlled activities with a view to his acquiring the investment, or receiving the services or receiving information about those investments or services, are exempted. This exemption will only be of relevance to corporate customers or others who are acting in the course of business. Other types of customers will not be subject to section 21 to begin with.

This exemption does not help in situations where the original financial promotion was made or directed under an exemption which did not require it to include any indications or information. However, it is likely that, in many cases where no indications or information are required, the exemption to which the earlier financial promotion applies would also apply to any follow up financial promotion. The requirement that the follow up financial promotion be made by the person who made or directed the earlier one would seem to prevent use of the exemption by someone acting on behalf of that person. However, the earlier financial promotion may have been made or directed by an individual in his capacity as an officer or employee of a company or a partner or employee of a partnership. If so, the exemption will be satisfied if the follow-up financial promotion is made by another employee, director or partner of the same company or partnership.

P does not receive any financial reward for making the introduction other than from the recipient of the financial promotion; and

(3)

the recipient of the financial promotion has not, in his capacity as investor, sought advice from P or, if he has, P has declined to provide it and has recommended that he seek advice from an authorised person.

For the purposes of (2), it is the FCA's view that P may be viewed as not receiving any financial reward other than from the recipient where P treats any commission or other financial benefit received from third parties to whom introductions are made as belonging to and held to the order of the recipient. P cannot simply tell the recipient that P will receive commission. The position must be that the commission belongs to the recipient and must be paid to him unless he agrees to its being kept by P. Where this occurs, the payment may be seen to be received by P from the recipient. In the FCA's opinion, the condition would be satisfied by P paying over to the recipient any third party payment he receives. Otherwise, it would be satisfied by P informing the recipient of the sum and that he has the right to require that the sum to be paid to him. This would allow the sum to be used to offset fees due from the recipient for other services provided to him by P. This could take the form of an agreement between P and the recipient that sums received by P will be used to offset any other fees due to P from the recipient. This is provided that P informs the recipient of sums which P has received and of the fees which they have been used to offset. However, it does not allow P to keep third party payments by seeking the recipient’s agreement through standard terms and conditions. Similarly, a mere notification to the recipient that a particular sum has been received coupled with a request to keep it does not satisfy the condition.

The conditions in article 18(2) include a requirement that the person making the financial promotion does not select, modify or otherwise exercise control over its content before it is transmitted or received. Article 18(3) provides that a person is not selecting, modifying or exercising control merely as a result of having power to remove material which is illegal, defamatory or in breach of copyright or at the request of a regulatory body or where the law requires him to do so. However, in the FCA's view, the control normally exercised by newspaper publishers or broadcasters over traditional forms of advertising they carry is likely to be enough for the exemption not to be available to such persons.

The conditions in article 18 also require that the person acting as the mere conduit must communicate in the course of an activity1 carried on by him the principal purpose of which is transmitting or receiving material provided to him by others. In the FCA's view, what matters is that the person is carrying on an activity1 which has the required principal purpose. Such an activity1 might represent but a part of a person’s overall business1 activities (however small), so long as it represents a discrete activity.1 A discrete activity1 is an activity whose principal purpose is to receive and transmit other persons’ communications and which is not simply an activity that is carried on 1incidentally or as an adjunct to another activity.1 For example, a person who operates a website will not be entitled to the exemption (should he be communicatingfinancial promotions see PERG 8.6) simply because he chooses to provide a chatroom or bulletin board for the use of his customers.

Article 19(4) sets out conditions which, if all are satisfied, offer conclusive proof that a financial promotion is directed only at investment professionals. These conditions relate to indications accompanying the financial promotion and the existence of proper systems and procedures. The guidance about proper systems and procedures in PERG 8.12.6 G applies equally to article 19. Article 19(6) specifically states that a financial promotion may be treated as made only to or directed only at investment professionals even if it is also made to or directed at other persons to who it may lawfully be communicated. This would include overseas persons and high net worth companies, etc. Where this is the case, the conditions in article 19(4) should, in the FCA's view, be satisfied if:

(1)

the indications make it clear that the financial promotion is directed only at investment professionals and other persons to whom it may lawfully be promoted; and

Journalists (article 20)

The broad scope of the restriction in section 21 of the Act will inevitably mean that it will, from time to time, apply to journalists and others who make their living from commenting on news including financial affairs (such as broadcasters). This is liable to happen when such persons offer share tips or recommend the use of a particular firm for investment purposes. Such tips or recommendations are likely to amount to inducements to engage in investment activity.

The Treasury, in making the Financial Promotion Order, noted that financial journalism has an important part to play in increasing consumer awareness of financial services and products. It further observed the need to strike the right balance between protecting consumers and ensuring that the level of regulation is as light as possible, while respecting the principle of the freedom of the press.

a regularly updated news or information service (such as a website or teletext service); or

(3)

a television or radio broadcast or transmission.

In addition, the publication, service or broadcast must be one which satisfies the principal purpose test set out in article 54 of the Regulated Activities Order. This means that the principal purpose must not be to advise on or lead or enable persons to buy or sellsecurities or relevant investments. See PERG 7 for further guidance on this. Article 20 does not define what is meant by a person 'acting in the capacity of a journalist'. In the FCA's opinion, this expression has a potentially wide meaning. It will apply to anyone who writes for or contributes to a publication, service or broadcast. This includes experts or analysts who may be asked to contribute articles for a publication or website service or to offer their opinion in a broadcast.

Provided the conditions in PERG 8.12.25 G are met, the exemption in article 20 applies to any non-real time financial promotion. However, there is an additional condition where the subject matter of the financial promotion is shares or options, futures or contracts for differences relating to shares and the financial promotion identifies directly a person who issues or provides such an investment. In such cases, the exemption is subject to a disclosure requirement which is itself subject to certain exceptions (see PERG 8.12.27 G). This requirement is that the financial promotion must be accompanied by an indication of the nature of any financial interest held by the person responsible for the promotion (that is, the journalist or editor) or member of his family (his spouse or children under 18). A financial interest would be subject to disclosure where the person or a member of his family would be likely to get a financial benefit or avoid a financial loss if persons acted in line with the financial promotion. Article 20 does not specify the way in which a financial interest should be indicated. In the FCA's view, a financial interest should be disclosed in a way that will enable recipients to understand readily its nature. For example, 'the writer has a substantial holding of traded call options in these shares'.

The effect of PERG 8.12.27G (2) is that financial promotions made by journalists in publications, services or broadcasts to which one of the codes or the guidelines apply are not subject to the disclosure requirement. This is so even if a financial promotion is made in breach of the codes or guidelines. Such financial promotions would remain to be dealt with by the body responsible for the code or guidelines and the publisher concerned. The code or guidelines may, of course, themselves require disclosure but the fact that they have been specified does not necessarily mean that they will or will always require disclosure. That is something which depends on the requirements of the particular code or guidelines.

The effect of PERG 8.12.27G (1) is that a journalist will not breach section 21 by not disclosing a financial interest, providing that the publication, service or broadcast concerned operates proper systems and procedures. As with the exemption in article 12 of the Financial Promotion Order (see PERG 8.12.6 G), what proper systems and procedures are will be a matter ultimately for the courts to determine and may vary according to the medium used. It will depend upon all the circumstances surrounding the publication, service or broadcast. In the FCA's opinion, proper systems and procedures may achieve the objective of preventing the publication of communications without the required disclosure in one of two ways. They may require that disclosure be made. Or they may seek to prevent journalists from acting in a way which would enable them to profit if persons follow their published recommendations. For example, by banning their dealing in the shares or related investments for a reasonable period following the promotion. This would ensure that the journalist will not have a financial interest to disclose. For example, and in the FCA's opinion, a publication, service or broadcast may be likely to satisfy the test referred to in PERG 8.12.27G (1) if it has set up procedures:

(1)

for persons responsible for devising the content of financial promotions, or for deciding that they should be included in the publication, service or broadcast, to register their financial interests in a central log;

(2)

for the central log to be properly maintained and regularly reviewed;

(3)

where disclosure is required, for all financial promotions to be subject to review before publication or broadcast by an appropriately qualified and senior person; and

(4)

for the persons referred to in (1) to be made aware in writing of the procedures and of their obligations to disclose their financial interests or to refrain from any course of action which may be likely to give them a financial interest requiring disclosure and, preferably, to have confirmed their acceptance of those obligations in writing.

Persons such as experts or analysts may be approached to contribute at very short notice and may be overseas. In such cases, the systems and procedures referred to in PERG 8.12.29 G may not be practical. It is the FCA's opinion that, where occasional contributors are concerned, proper systems and procedures may include arrangements for ensuring that the need for disclosure (or the avoidance of financial interests) is drawn to the contributor’s attention before the communication is made. The contributor’s confirmation that he understands and accepts the position on disclosure would also need to be obtained. The arrangements for bringing the position on disclosure to the contributor’s attention and for obtaining his understanding and acceptance should be made in whatever way is most appropriate in the circumstances. In other cases, it may be enough that the persons responsible for the broadcast satisfy themselves that contributors represent reputable regulated businesses. And that it would be reasonable to believe that they would not seek to promote an investment or investment service in which they had a financial interest without disclosing that fact. This is, of course, merely an example and not the only circumstances in which overseas broadcasts may be regarded as having proper systems and procedures.

It appears to the FCA, however, that there will be situations when it may not be practical for the persons who are responsible for a publication, service or broadcast to apply proper systems and procedures to every person who may, whilst acting in the capacity of a journalist, communicate a financial promotion. For example where persons are asked to stand in at the last moment. In such cases, it is the FCA's opinion that the benefit of the exclusion will not be lost as respects those persons who are subject to the proper systems and procedures. However, any financial promotionscommunicated by persons who are not subject to them would still be subject to the restriction in section 21 and would need to be approved by an authorised person or otherwise exempt.

The main purpose of the exemption appears to be to guard against the possibility that, during the course of a broadcast interview or a live website presentation, a financial promotion is made inadvertently by a director or employee of a company or other business undertaking when he is not acting in the capacity of a journalist (see PERG 8.12.25 G). The exemption applies if the financial promotion relates only to:

comprises words which are spoken by the director or employee and not broadcast, transmitted or displayed in writing; or

(2)

is displayed in writing only because it is part of an interactive dialogue to which the director or employee is a party and in the course of which he is expected to respond immediately to questions put by a recipient of the communication.

This is provided that the financial promotion is not part of an organised marketing campaign. PERG 8.14.4G (3) provides guidance on the meaning of an organised marketing campaign. In the context of article 20A, it is the FCA's view that an individual or isolated financial promotion will not represent or be part of an organised marketing campaign. However, a company representative may use a broadcast interview or webcast to encourage or incite viewers or listeners to acquire investments or investment services which are the subject of an advertising campaign being conducted at the same time. In such cases, any financial promotion contained in that interview or webcast will be part of an organised marketing campaign. Where this is the case, the company representative may be able to rely on other exemptions depending upon the subject matter of the financial promotion – see PERG 8.21.

The first part of the exemption (referred to in PERG 8.12.34G (1)) specifically precludes any form of written communication. However, the FCA understands that the Treasury did not intend to prohibit the use of written words in the form of subtitling. These may be an aid to those with hearing difficulties or to interpret a foreign language, or the use of captions which supplement a spoken communication by highlighting aspects of it without introducing anything new. The FCA cannot fetter its discretion and must consider potential breaches of section 21 of the Act on their merits. However, where the only reason why a person may have breached section 21 of the Act is because he has used subtitling or captioning in this way the FCA would not expect to take further action. In the FCA's view, the position is different if a transcript of the spoken communication is later made available. This would be a separate communication and would need to be approved or otherwise exempt.

The second part of the exemption (referred to in PERG 8.12.34G (2)) envisages that the director or employee will be holding the equivalent of a conversation conducted in writing. Typically this will involve the exchange of e-mails. It is possible that this part of the exemption could be used by companies making so-called webcasts over the Internet. However, this would only be the case if the service through which the webcast is provided is a regularly updated news or information service (and which meets the principal purpose test – see PERG 8.12.25 G). There is no reason why the exemption should not apply to a company website which provides regularly updated news or information about the activities, products or services of the company where the website represents a service provided to those who use it. However, not all company websites will be services of this kind.